(1873) The Theory of Inflation: A Critical Examination of a Ruinous Popular Fallacy

8/9/2019 (1873) The Theory of Inflation: A Critical Examination of a Ruinous Popular Fallacy

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The Theory of InflationBy'^nrey -d

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UNIVERSITY OFCALIFORNIAT LOS ANGELES


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THE THEORY OF INFLATION.

A Critical Exarnimition of a Ruinous Popular Fallacy.Reprinted from the Philadelphia Evening Telegraph of November 8, 1873.

To the Editor of the Evening Telegraph :More tliaii a century ago David Hume published liis Esmy on Honey,

which consists of a succession of brilliant but disjointed thoughts, parttruths, i)art fallacies, so intermingled, and so plainly inconsistent onewith anotiier, that the reader is at times at a loss to know whether theauthor be a believer in the advantages of a constant, an increasing, or adecreasing volume of money in any community or country. However,the so-called principles, the assumed-to-be truths of the contractionistare derived from tliis very source, which is the real and original fountain-head of this contractionist's monetary philosophy. This philosophy hasi)ut little even to-day to offer us which is not drawn from Hume, and inthe main it is but the carrying out to its logical conclusion of a singleone of his leading propositions.Senator Sherman, for instance, deeply imbued with this one doctrine,hiis in an official paper committed himself in the fullest manner to it andits consequences, and from him we may learn to what extent these conse-([uences go. In reference to the reissue of the so-called " reserve" of$44,000,000, Mr. Sherman, in a report of the Senate Finance Commit-t;;e, January, 1S73, said that "the full e.xercise of such a i)ower wouldundouljtedly ulVect the nominal value of all i)roperty in the United Statesto the fc.xlent of at least 10 ]ier cent., and the real value or burden asbetween deblur and creditor at least 10 per cent, on all contracts to bejtcrformed in fnturoy ^

liCt us now see how this would work in actiwil practice. The valueof all the property in the United Stales in 1870 was $:;0,000,000,000,so its increase Ijy 10 percent would add to it $;{, 000,000, 000. Can anymore extraordinary assumption well Ite imagined, than that $44,000,000of currency should have the power to add to the value oC the existing


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2property of this country $;5, 000,000, 000, or over sixty eij-Iil limes itsown volume ?From wlint ohservntiou of fnets, nnd 1iy wlmt form mul nuiuuer of

reasoning, ean this conehision he iirriveil at ? Why, firsl hy the gratuitousassumi)tion of Hume, that the ))riees of all things in any country, alany and at all times, are lixed as they so stand in that country "l)y theproportion between commodilies and money" in tliat country, and then,further, by the easy step that any increase of money, witliout an increaseof commodities, must increase prices in exact proportion.

But if i)rices depend solely upon "the proportion between commodi-ties and money," how is it tiiat with but $750,000,000 of currency inthis country, we find $30,000,000,000 of commodities and other pro-}ierty ? According to the dictum of the school, we should look for andlind but $750,000,000. It will not do to tell us that this money circu-lates, and thereby gives value to $30,000,000,000 of commodities andother property. This is not in harmony, I)ut in direct conflict v\'ilh theteachings of the school. With it money is, as it were, but an inert,lifeless mass, possessing what may be termed statical, but not dynamicalqualities a mere yardstick or dead-weight, which by its own simpleand single length or ponderosity, acts as an inflexible, unyielding deter-miner of the value of the total mass of the commodities in a country.To tell ns that it circulates, and tlius has a new power, a new function,a new office, is to change the very terms of the proposition. But evenif this new factor be thus dragged in, it must be on the necessary condi-tion that at all times, and in all places, and among all peoples, moneycirculates at a given and constant rate of velocity. There can be nopossible escape from this necessity. Ui)on which horn of the dilemmathen, will the contractionist hangthat of asserting of money that it])0ssesses no life-giving property, or that, while possessing such power,that power always and everywhere acts with equal force? One or theother he must take, and each is equally opposed to experience as well asto common sense.

But, further, with his inflexilde effect of the " proportion betweencommodities and money," the disciple of Hume is forced into the addi-tional and necessary logical position of maintaining that no increasedamount in the production of commodities, by the application of steamand machinery; by the subjugation of new lands to the control of man,or the improvement of the old ones; by the discoveries of science, orby the arts of civilization ; by the increase of population or of intelli-gence; even be the results such as to give a yield of ten, twenty, or fifty |fold, as compared with that of the past, ean add one dollar to the

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aggregate value of those commodities unless accompanied by an increaseof currency! Will even our American contractionist seriously maintaina proposition so utterly absurd, so notoriously false ?

Let us now inquire what are the real forces at work in governingprices? They arethe quantities of the commodities, the cost of re-production, the number of the persons desiring to possess such commo-

^ dities, and the means at the command of such persons towards such-0 possession. Hence we find that in all countries almost exclusively en-r- gaged in agriculture, the prices of agricultural products and of labor are

low. There being l)ut few persons not engaged in agriculture, there canrodiicts have largely fallen, be-

cause of the increasing jiower of steam and machinery. Manufactured^^ goods flow out (jf these countries, in an ever-increasing volume, to lands^ which have not developed their industries, and in wiiicli labor is low,

and which export their precious metals. Surely, Germany, France, andIJclgium, with their immense acquisitions of the jirecious metals, and eachwith the addition of a large circulation of notes, do not present a singlefact going to su|>porl the theory of inflation.

In the numljcr of persons in a country desiring to |)ossess, by pur-chase, commodities tho productions of their own countrymen, we have

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nil almost niicrrinj]^ mcssure of tlictlivcrsiGcation of cMiiploj'mcntR in tliatcountry, for tlu> {greater the diUcreiices the greater niitl the mure rapidwill be the intercourse and the deniaiul for sueli eonunodities. J)ul herothe money question only enters so far as that money succeeds in cjuickcn-injr societarylife into vij;orons and healthful action. The function heroexhibited is not that of the mere yiirdsiick or the pound weight, but isclosely analogous to that of the blood that courses freely through theveins and arteries of the healthy animal organism. In such a state wehave not alone consum})tion, but ])rodi'iction, the two constituting aliappy and a hnrmonious balance of forces nii exhibition of phenomenaentirely the reverse of the discords so confidently held I)y the disciplesof Hume. During the late War of the Rebellion this balance wasgreatly disturbed l)y the abstraction of a large number of able-bodiedmen from production, and by the enormous demands of the governmentfor subsistence, clothing, and the materials of war generally. Fromthis cause and from excessive taxationa nieiisure, in part, of the de-mands of the government for commoditiesprices rapidly advanced,and yet the schoolman could see nothing in these results but an evidenceof the truth of his delusioninflation.

Having seen that prices cannot be governed by " the proportion be-tween commodities and money," but that they are largely dependentupou the quantities of commodities, the cost of reproduction, and thenumber of persons desiring to possess such conmiodities ; let us nowinquire how the means at tht^ command of such persons towards suchpossession affect prices and how far it is possible, by legislative enact-ment, to keep those means from the possession and control of thepeople.The general and wide dissemination of wealth among a people must

exert a strong influence towards advancing prices among such people sofar as consumption alone can do it, by increasing the body of con-sumers ; -.vhile, on the contrary, an equal amount of wealth concentratedin the hands of a few will exert less influence in that direction, for thereason that while these favored ones may live in luxury, the many mayliardly be able to command the mere necessaries of life, and the greataggregate of consumption be thus limited. These two conditions arewell illustrated, the first in the United States, and the last in GreatBritain. However, even the effect of a large measure of consumptionis to result in a conteracting oneproduction, which may and oftendoes check any advance in prices.Now let us see how far a State can, by legislative enactment, sointerpose its fiat as to succeed in preventing its people from purchasing


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and consuming, or holding for speculative ends, such coramodities asthey are bent on havingfor this is i-eally the question before us, oncethat we have disposed of the theory that prices depend upon " the pro-})ortion between commodities and money." Our illustrations and ex-amples shall be taken from Great Britain. That country has, for acentury or more, in its financial affairs, been completely under the con-trol of men of the school of Hume, and during the latter half of thisperiod she has maintained so-called specie payments. There, whereevery eflort has been made to carry out the system, may we look for theripened fruit of it. In England all notes under 5 have been interdicted,and it has only been by reason of her native pluck and energy thatScotland has been enabled to obtain and retain them, after more thanone severe contest.A recent intelligent English writer on finance and banking estimatesThe srold and silver in circulation in Great

Britain at 70,000,000 $339,500,000The circulation of the Bunk of England, Oct.

16, lb72. was 34,328,708 166,500,000The notes in circulation in the United King-dom, other than those of the Bank of Kug-hind, September, 1872, were as follows :England, .o,057,'J10; Scotland, 5,313,560;Ireland, 7,242,081 17,613,551 85.425,000

Total $591,425,000Tlere we have in less than $000,000,000, the circulating medium ex-

pressly provided ly the government for its people, either by its owncoinage or through those institutions which it has yjermitted to issuecirculating notes. But is this medium, with its capacity for vital work,a full measure of the imrcliasing jiower at the command of the peopleof Great Britain ? Has the Englishman Ijcen content to feel that hereare the monetary instruments placed at his disposal by his Parliamentand sovereign, and that with these alone and none others shall he work ?By no means !

11. n. I. Palgrave, E^q , a recent able writer and slatisticinn, in apaper read before the Slalistical Society of Ijondon, of which he is amember, declares u|)on data admitted to l)e sound, that the deposits ofthe British l)anks amount to 584,000,000, or nearly $2,900,000,000.The same writer, in his NoIch on JlrmHiif/, from a very careful analysisof the sales of stamps for l)ills payable for a series of years, estimates theaverage amount of l)ills in existence at any one time in 1870-71 as fol-low.s :


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Inland or ilomostic bills . . , 210.8r)0.n00Foreign bills drawn on I'.nuliuul . . ;{(), 700,(1(10

.C-2tl.f>50,000 over $1,200,000,000If, then, we consider the extent to wliieh tlic eredit system is enrried

in [)riviite transndions in Knicland, and espeeiiilly the enorinons aeconntsrnn np by the nobility and riivate or other debts for which no bills are given 1,200,000,000

S.>,300,00(),000

$5,300,000,000 of purchasing power nine times the volume of thecurrency of the country almost wholly the result of the use of credit.By the aid of l)ai)k eliectks and clearing houses, this credit system ismaintained with the smallest possible allowance of bank notes andspecieMr. Palcrave placing the l)ank reserve of all Great Britain aslow as four (4) per cent., $110,000,000, while the daily average clear-ings of the London Clearing House alone are nearly $100,000,000.The bank deposits, almost wholly the creation of the banks, through theloan of their credit, are, for all purposes of buying for consumption,trade, and speculation, as ellicient and as active as circulating notes.The bills of exchange and private debt-charges lack the activity of cir-culating notes and bank deposits, but are permanent and constant repre-sentatives of the power of purchase, until a crisis comes to contracttheir volumes.

If these, then, be the results of repressive monetary legislation in thehome of David Ilume, and in the land in which his doctrines have solong reigned supreme, is it not entirely evident that all legislative at-tempts to control the trading and speculation of an active, enterprising,intelligent, and free people, Ijy imposing an arbitrary limit to the amountof their circulating medium are utterly futile? Is it not even worse thanthis ; for does not such legislation, while depriving those people of thepower to deal for cash, force them to resort to the various forms of credit

at once the forerunner of financial crises and the food on which thosecrises feed? But, further, does not this particular system look some-what like injlation run mad, and is not the fact that under it allcommodities are not dearer in Great Britain than in every other country


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in the world evidence conclusive against the soundness of the contrac-tioiiist's great theory ?

Let any one for a moment consider what would be the practicalresults to England if its people had permitted themselves to be limitedin their operations by the $600,000,000 of circulating medium furnishedto them by or through their government. The prosecution of her im-mense manufactures and foreign trade would be an utter impossibility,and it would be entirely out of her power to negotiate the large loansto foreigners, which are paid for by her exports of manufactured goods,and the peTmonent carrying of xvliich loans is only possible by reasonof the Biislence of this large volume of bank and other credits. Never-theless, this system of credit, which has grown out of persistent, longcontinued, and vicious legislation in regard to money, is top-heavy andessentially unsound and dangerous, and liable to topple over at any andat all times. During the war of the rebellion, througli our ample supplyof currency and our great business activity, we were enabled to carryalmost our entire government indebtedness, and it was not until peacecame, and with it contraction of that currency, that it became necessaryto seek foreign aid. Before that contraction commenced our peoplewere more free from debt, in proportion to the volume of business, thanat any previous period in our history.' All this is, alas ! now most sadlychanged.The circulation of the Bank of France, October, 1873, was nearly

$600,000,000, and although specie i)ayments have been suspended sinceSeptemljer, 1870, gold and silver there circulate freely, the premiumbeing but about ^ per cent., and there cannot be less than $700,000,000of those metals in the country. The private deposits in the bank wereless than $4f),000,000, and business is at all times largely done for realcash. In Germany a very similar state of things exists.

Let Congress, then, as in duty bound, dismiss from its thoughts atonce, and forever, any l)elief in the fallacy which Hume has given to theworld, that prices are fixed " by the proportion between commodities andmoney," and in the sad delusion that it is in the power of any legislativebody, in fixing an arbitrary limit to the circulating medium of a peoplelike our own, or the English, to put a limit to their business transactions."When once they shall have so far cleared their mental jjcrceptions, theywill l)e prepared to give us a full supply of national jHiper money havingthe feature ofintercha/igeability {at the ojition of the holder) xcitit govern-ment bonds bearing a fixed raUi of interest. In such interchangeabilitythere is "u subtle principle that will regulate the movements of financeand commerce as accurately as the motion of the btcum-enginc is rcgu-


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8Inted I)}' its jjovonior," and tliiis protoct tlic people mid the Stiite IVointlio diniijers incident td iill arliili'inv enipiiic;il liniitins^ of the cirenhitin}i^iiH'diuni in iTtjard to llic re(piisite vohiinc oi' which, im a /*r/07'/ jadfjjniontcan enable any man or Ixxly of men to decide npon and lix correctly.^Vhen once wo are freed from the practice of such einpiricisnt, then shallwe have tinancial stability and secnrity against those terrible crises whichliave so often visited (Jreat i>ritain and the United States, the two conn-tries, of all Christendoni, the most completely under the doininntion oi'the fallacies of iidhition, and of the power of lejjislative l)odics to liuntand control the business operations of a [teople. Then shall we havel>rosperity, hapi)iness, and real peace, and forever rid ourselves of thatelement in our system which, by creating panics and crises, is the mostpotent in making the rich richer and the poor poorer.HENRY CAREY BAIRD.PuiLADEU'iiu, November 7, 1873.

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(1873) The Theory of Inflation: A Critical Examination of a Ruinous Popular Fallacy

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